Covid-19 is foisting changes on business
that could be beneficial
CEOs should be aware of the potential opportunities
In february 2014 a strike on the London Underground offered management theorists a
lesson in resilience and adaptation. Because the shutdown closed some but not all Tube
lines, frustrated Londoners were forced to rethink their commutes to and from work.
Researchers at Oxford and Cambridge universities subsequently found that around 5% of
passengers stuck to their new itineraries even after normal service resumed. The long-
term economic gains of one in 20 travellers adopting new and improved ways to get to
work turned out to be greater than the short-term costs of the disruption.
The global covid-19 outbreak presents a far greater challenge to the corporate world
than striking transport workers. Profit warnings are spreading nearly as fast as the
disease. Analysts at Goldman Sachs, a bank, estimate that earnings growth for firms in
the s&p 500 index could grind to a halt. Gauges of business activity, such as purchasing
managers’ indices, have cratered in Asia and are expected to weaken elsewhere as the
coronavirus crosses more borders. Consumers are spending money on little except
sanitary wipes, face masks and tins of Campbell’s Soup. Fears of a pandemic have wiped
$7trn off the market value of listed firms worldwide in the past fortnight (see article).
Some companies will, like most of London’s commuters, revert to autopilot once the
threat recedes. But for others the interruption will have a lasting effect, accelerating
trends in business organisation that were already under way. Two are particularly
important. The next few months are set to be a giant experiment in whether new
technologies can allow successful mass remote working for employees, speeding up the
reinvention of the office. And for firms already worried about rickety supply chains amid
a trade war, the virus gives another reason to reconfigure them.
Take employees first. Companies have had to ask themselves whether to let employees
travel, attend conferences or even come into the office. In all three cases the answer is
increasingly “no”. Many big firms, including Amazon and JPMorgan Chase, have banned
all non-essential excursions. Airlines and hotels are reporting steep falls in bookings.
Corporate Travel Management, a listed Australian firm that organises business jaunts,
has warned the impact could last up to six months. It has slashed its earnings forecast
for the year by up to 16.5%. A survey by the Global Business Travel Association, an
industry body, found that business travel, which costs companies over $1trn a year (and
emits roughly as much carbon as Ukraine in flights alone), could fall by over a third while
the epidemic rages.
Large corporate events are being called off. The oil industry’s biggest annual jamboree in
Houston and the Geneva motor show will not take place this month. Google and
Facebook have given the term “teleconferencing” a whole new meaning by moving a few
of their big shindigs partly or wholly online. With Milan and Paris fashion weeks curtailed,
Armani streamed its autumn/winter show from behind closed doors. This is bad news for
events firms such as Informa, whose share price is down by a fifth since the start of
February, especially at a time when many high-profile industry powwows are already
losing their lustre.
At the same time more companies are learning to love telecommuting. On March 3rd
JPMorgan Chase told thousands of its bankers in America to work from home as it tests
its contingency plans. Twitter has asked its 5,000 employees to do likewise. Sony went so
far as to shut some of its European offices altogether, just in case. The affected workers
are nonetheless expected to toil remotely.
As well as highlighting how bloated some travel budgets are, virus contingency plans
may also reveal how inefficiently office space is used. Big British and American firms pay
on average $5,000 per employee in annual rental costs. Just 40-50% of desks are
actually used during working hours—often not very well. Last year two in five
respondents to a survey of 600,000 desk-jockeys by Leesman, a data provider, said their
office prevented them from working productively. If their managers now find that
productivity does indeed rise—or at least doesn’t dip—as staff self-isolate at home, the
case for teleworking may look irresistible. Investors are betting it will. In the past month
the share prices of Slack, a corporate-messaging platform, and Zoom, which makes
videoconferencing software, have shot up by 18% and 35%, respectively.
The second way in which companies are rethinking their business has to do with supply
chains. Since the 1980s these have become more complex and global, with large firms
now dependent on thousands of suppliers. The embrace of lean manufacturing and just-
in-time delivery of components, pioneered by Toyota in the 1970s, has made production
more efficient but more vulnerable to disruption, as companies stockpile fewer and fewer
necessary materials. The median firm in the s&p 500 carries only 66 days of inventory,
and some have far smaller buffers than even that—Apple has just nine days, according to
data from Bloomberg.
When natural disasters strike big companies usually get by, shifting production
temporarily from afflicted areas to those that are not. But unlike a flood, an earthquake
or even the Sino-American trade war, all of which companies have some experience in
planning for, covid-19 could affect all of a firm’s actual and potential subcontractors
simultaneously. In such a scenario carrying bigger inventories and having suppliers at
home may no longer look wasteful. It may come to be seen as necessary.
Immune response
The coronavirus will not make business travel or lean global supply chains disappear.
Chinese factories are cranking up again and high-flyers will, in all likelihood, be back in
airport lounges soon enough. But the crisis offers a chance to experiment with new ways
of doing things—and to question the wisdom of old habits. Chief executives should not be
immune to the opportunity.■
This article appeared in the Business section of the print edition under the headline "Plan
V"
https://www.economist.com/business/2020/03/05/covid-19-is-foisting-changes-on-
business-that-could-be-beneficial
